Start Here: 5 Things You MUST Know About Surplus Lines
Surplus lines = insurance from companies NOT licensed in your state
Must be rejected by 3 regular insurers first (Diligent Effort)
Only a licensed Surplus Lines Broker can place this coverage
The Exportable List skips the 3-rejection requirement
NOT protected by state guaranty fund - if the insurer goes bankrupt, you may lose coverage!
What is Surplus Lines Insurance?
First, Let's Understand the Problem
Sometimes, no regular insurance company in your state wants to cover a particular risk. Maybe it's:
- - Too unusual (you want to insure a hot air balloon business)
- - Too risky (your building is next to an active volcano... okay, not in NJ, but you get the idea)
- - Too specialized (professional liability for lion tamers)
- - Requires more coverage than regular insurers offer
The Solution: Surplus Lines Insurance
Surplus Lines insurance comes from insurers that are NOT licensed (authorized) in your state. They operate outside the regular insurance market.
Think of it like this:
Regular insurance is like shopping at Walmart - they have most common items. But if you need something super specialized (like a custom-made wedding dress), you have to go to a specialty boutique. Surplus Lines insurers are those specialty boutiques - they handle the unusual stuff regular stores don't carry.
Wait - If It's Riskier, Why Would Anyone Use Surplus Lines?
Good question! Sometimes surplus lines is your ONLY option. But there can also be benefits:
More Flexibility
Surplus lines insurers can customize policies more than regular insurers who follow standard forms
Higher Limits Available
May offer coverage amounts that regular insurers won't
Unique Risks Covered
They specialize in unusual situations regular insurers don't understand
Sometimes Competitive Pricing
For certain specialty risks, may actually be cheaper than admitted market
Admitted (Authorized) Insurer
An insurance company that IS licensed in your state. They have a Certificate of Authority from NJ.
Examples: State Farm, Allstate, GEICO - all licensed to sell in NJ
Nonadmitted (Surplus Lines) Insurer
An insurance company that is NOT licensed in your state. They handle the unusual risks.
Examples: Lloyd's of London, specialty carriers that focus on unique risks
The "Diligent Effort" Requirement
Rejections Required!
This is a KEY exam number!
Before a surplus lines broker can place coverage with a nonadmitted insurer, they must prove they tried the regular market first. This is called a "Certificate of Diligent Effort" or just "Diligent Effort."
What Exactly is "Diligent Effort"?
Diligent effort means the broker must show that the risk has been declined by at least 3 authorized insurers, where:
Each insurer must be authorized to write that type of insurance
You can't ask an auto insurer to decline your commercial property risk - they don't write that type anyway!
The broker must have good faith reason to believe each might consider the risk
You can't just ask 3 random companies you know will say no. They must be companies that reasonably might write this type of coverage.
Real-World Scenario: The Haunted House Attraction
The Setup: Tom runs a professional haunted house attraction during Halloween. He needs liability insurance because people could get scared and trip, or actors could accidentally injure someone.
What Happens: Tom's insurance broker calls State Farm - "Sorry, we don't insure haunted attractions." Then Allstate - "Nope, too risky for us." Then Liberty Mutual - "We'll pass." That's 3 rejections from authorized insurers.
The Solution: Now the broker can document this "diligent effort" and place coverage with a surplus lines insurer like Lloyd's of London, which specializes in unusual risks.
The Result: Tom gets his coverage, but he pays more and has less protection if the surplus lines insurer fails.
The Exportable List - A Shortcut!
What is the Exportable List?
Sometimes the Commissioner already KNOWS that certain types of insurance can't be found in the regular market. So they create a list of these types of coverage.
If your coverage is on the Exportable List:
You DON'T need to get 3 rejections! The Commissioner has already determined there's no reasonable market in the state, so you can go straight to a surplus lines insurer.
NOT on Exportable List
1. Try to place with authorized insurer #1
2. Try to place with authorized insurer #2
3. Try to place with authorized insurer #3
4. All 3 decline? Document it.
5. NOW you can use surplus lines
Takes more time!
ON the Exportable List
1. Check - is this type on the list?
2. YES! Go directly to surplus lines
3. Skip the 3 rejections
4. Place coverage immediately
Much faster!
How Does Something Get on the Exportable List?
Surplus Lines Brokers - The Specialists
Who Can Place Surplus Lines Coverage?
Only a specially licensed Surplus Lines Broker can place coverage with nonadmitted insurers. Regular agents and brokers CANNOT do this without the special license.
Why the special license?
Because surplus lines insurance is riskier for consumers (no state guaranty fund protection), the state wants to make sure only qualified professionals handle these placements. The broker must understand the risks and properly explain them to customers.
What Must the Surplus Lines Broker Do?
Before Placing Coverage:
- 1. Document the diligent effort (3 rejections) OR verify the risk is on the Exportable List
- 2. Verify the surplus lines insurer is financially sound
- 3. Explain to the customer that this is a nonadmitted insurer
After Placing Coverage:
- 1. File required reports with the state
- 2. Collect and remit applicable surplus lines taxes
- 3. Keep proper records of the transaction
IMPORTANT: No Guaranty Fund Protection!
When you buy insurance from an admitted (authorized) insurer, you're protected by the state guaranty fund. If the company goes bankrupt, the fund helps pay claims.
But with surplus lines:
There is NO guaranty fund protection. If your surplus lines insurer goes bankrupt, you may lose your coverage AND any pending claims may not be paid. This is why surplus lines should only be used when absolutely necessary!
Surplus Lines Cheat Sheet
Print for quick reference3
Rejections required (Diligent Effort)
Exportable List
Skips the 3-rejection requirement
Annual
Exportable List compiled yearly
Surplus Lines Broker
Only they can place this coverage
Nonadmitted
Insurer NOT licensed in state
NO Guaranty Fund
No protection if insurer fails
Exam Trap Alerts
It's 3 Rejections, Not 2 or 5
The diligent effort requires exactly 3 authorized insurers to decline. Don't be tricked by other numbers!
Exportable List = NO Rejections Needed
If the coverage type is on the Exportable List, you can skip the diligent effort requirement entirely. The exam loves to test this exception!
Only Surplus Lines Brokers Can Place This Coverage
Regular agents and brokers cannot place coverage with nonadmitted insurers. They need a special surplus lines license.
No Guaranty Fund = More Risk for Consumer
This is why surplus lines should only be used as a last resort. The customer has no state protection if the insurer fails.
The 3 Insurers Must Be Appropriate
Each of the 3 insurers must be authorized to write that specific type of insurance AND the broker must have good faith reason to believe they might consider it.
Quick Reference Summary
Surplus Lines Purpose
Coverage for risks regular insurers won't touch
Diligent Effort
3 rejections from authorized insurers
Exportable List
Commissioner's list that skips rejections
Who Places It
Licensed Surplus Lines Broker only
Consumer Risk
No state guaranty fund protection
When to Use
Only when admitted market unavailable